Guest blog: World Bank chief economist replies on his industrial policy proposals

July 7, 2010

     By Duncan Green     

Last week I wrote about Justin Lin’s intriguing suggestions for how developing countries can best pursue a low risk/high return form of Justin Linindustrial upgrading. Here Justin responds to some of the concerns and questions raised in that post:

“I am grateful to Duncan Green for his comments on my recent paper “Growth Identification and Facilitation”, which offer me the opportunity to clarify some of the ideas discussed there, and respond to the very pertinent questions he raised at the end of his post.

I certainly do not assume that “states possess a well informed, effective bureaucracy”. In fact development is a challenging process everywhere and all types of public policies and strategies—from education to health, from structuralist import substitution to Washington Consensus reforms— require some government capacity. However, the required capacity for the proposed Growth Identification and Facilitation framework is relatively minimal, compared to almost any other policy proposal: many of the specific instruments recommended in the paper are far easier to implement in low-capacity environments: setting up an export-processing zone for instance requires much less capacity than building infrastructure for the whole country as often advocated; implementing tax exemption  schemes for a few years to attract investments in industries with latent comparative advantage is easier than collecting large tax revenues or repressing the financial system to subsidize nonviable firms for endless years in industries that are inconsistent with a country’s comparative advantage.

Economic policy never takes place in a vacuum and there is wide consensus on the importance of having capable, credible, and committed governments to design and implement viable economic development strategies—something that is lacking, by definition, in many poor countries. The question is how to facilitate their emergence. While there is probably no ready recipe for generating effective bureaucracy, I would argue that the framework proposed in my paper would not lead to heavy-handed government interventions and large administratively-created rents. To the contrary, what I am proposing would help developing countries minimize the risks of poor governance and pervasive corruption. At the same time as the framework is easier to implement and likely to yield quick wins, the government’s commitment, credibility and capability may be enhanced as a result of following this approach.

Another important point raised by Duncan is whether ineffective leaders in developing countries actually know better which policies could lead to sustained growth but cynically choose not to implement them. The implicit assumption here is that the appropriate policies for generating and sustaining economic growth are known, but because of their bad instincts or the prevailing incentive systems, political leaders ignore them. It seems to me that things might not be that clear-cut. After all, economists have been looking for the recipe for growth for more than 200 years. The dominant theories for development policy in developing countries proposed by economic profession have been rooted in either structuralism (roughly from the 1940s to the 1970s) or in Washington Consensus-types of frameworks (from the 1980s onwards). The empirical evidence shows that both of them are inadequate.

My view is that most political leaders would like to gain legitimacy, stay in power and have a good name in history. They will be willing to do the right thing to achieve those personal ambitions if only they knew what that is and how to do it. Delivering sustained dynamic and inclusive growth during their tenures should be consistent with their personal goals.  Yet, the quest for growth has been elusive, to use Bill Easterly’s famous book title. The Growth Identification and Facilitation approach does not claim to offer a magic bullet, but it suggests a logical framework that could allow policymakers in developing countries to emulate successful strategies implemented throughout history. It is therefore compatible with prevailing political incentives.

Duncan’s last point is about the likelihood that old high-carbon growth pathways may not be an option for developing countries in the future due to the concern of climate change, rendering the industrial ladders implied in the Growth Identification and Facilitation inappropriate. One can realistically expect that as long as there will be demand for goods and services around the world, countries with the lowest production costs will be competitive in those industries. If one accepts that proposition, then two scenarios are likely to materialize: if low-carbon technology is not available at reasonable costs and the production of goods and services continuously relies on the existing technology, low-income countries could successfully move up the development ladder by using their low-wage advantage as suggested by the Growth Identification and Facilitation framework. If the new low-cost clean technology becomes available, low-income countries should adopt it and enjoy the “advantage of backwardness” in adopting new technology in their industrial upgrading process. However, the selection of their targets for industrial upgrading should still follow the methodology suggested in the Growth Identification and Facilitation Framework.”